Years ago, I found myself sitting in law school in Moot Court wearing an oversized itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I needed only to don my cape…. taxgirl® was born. Today, I live and work in Philadelphia, PA, one of the best cities in the world (I can't even complain about the sports teams these days). I landed in the City of Brotherly Love by way of Temple University School of Law. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. I even took the lead on a successful audit. At audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax.

Back to School: Education Tax Credits

Education tax credits can help offset the costs of paying for your education or costs you pay for an eligible student who is your spouse or a dependent you claim on your tax return. For 2011, the American Opportunity Credit and the Lifetime Learning Credit are available to qualified taxpayers who pay expenses for eligible students.

Credits are great because they are dollar for dollar reductions in your taxes due as opposed to deductions which merely reduce your income subject to tax.

The American Opportunity Credit isn’t so much new for 2009 through 2012 as it is the juiced up version of the Hope Credit. Under the temporary credit, you can offset the cost of $2,500 for qualified education expenses paid for each eligible student so long as you qualify. To qualify, your modified adjusted gross income (MAGI) can’t be more than $90,000 of single, head of household, or qualifying widow(er) or $180,000 if married filing jointly.

The American Opportunity Credit is available only for the first four years of postsecondary education (including years that you opt to take the Hope Credit). An eligible student must be pursuing an undergraduate degree or other recognized education credential and enrolled at least half time for at least one academic period that begins during the tax year. And don’t get me started on this narrow window but an eligible student may not have any felony drug convictions (I’m guessing murder is okay?).

The best part? Forty percent of the American Opportunity Credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you.

In contrast, the Lifetime Learning Credit is a credit of up to $2,000 for qualified education expenses paid for all eligible students. The income restrictions are also a bit lower: $60,000 if single, head of household, or qualifying widow(er) and $120,000 for married taxpayers filing jointly.

Unlike the American Opportunity Credit, there is no limit on the number of years the lifetime learning credit can be claimed for each student. The credit is also completely nonrefundable. And, also unlike the American Opportunity Credit, felony drug convictions don’t affect eligibility.

For purposes of both credits, qualified expenses include tuition and fees required for enrollment. They also include course-related books, supplies, and equipment.

Additionally, for purposes of both credits, qualified education expenses do not include amounts paid for insurance, medical expenses (including student health fees), transportation, room and board and similar personal, living, or family expenses – even if the payment of these expenses are a condition of enrollment or attendance.

As with the tuition and fees deduction, you can use money that you borrow in order to calculate the credit but you cannot claim the credit based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance.

Remember that you can’t claim the tuition and fees deduction and education credits for the same tax year. Run the math and figure out which is most beneficial to you.

Similarly, you can’t claim both credits for the same student. Again, do the math and figure which credit makes the most sense to claim for the current tax year.

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I am a parent that subscribes to your Taxgirl site and I love it! and I appreciate it greatly! My husband is a personal tax accountant who works part time on taxes out of our home. I am his ‘assistant’ so I love telling what I learn on your site. My least favorite thing in my daughter’s dorm room was her dresser. it was used for a kitchen cabinet (she kept dishes and food in it, and her microwave on it), an entertainment center (she kept her tv on it), a dresser (she did actually keep some clothes in it), and a catch all in the small spot left on top. And it was the most worn piece in the room – ugly, little finish left on it and a broken drawer front! I hated it.